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“Hospitals can achieve must-have status—meaning health plans must include them in their networks to offer insurance products attractive to employers and consumers—in a variety of ways,” testified Ginsburg, who also serves as research director of the National Institute for Health Care Reform, at a hearing of the U.S. House of Representatives Ways and Means Subcommittee on Health examining health care industry consolidation.

“Hospital reputation for perceived quality—not to be confused with measured clinical quality—is a particularly powerful factor,” Ginsburg testified. “Some independent hospitals that do not have large market shares have substantial leverage on the basis of their reputation for quality or their niche within a particular geographic area….Some hospitals have leverage on the basis of highly specialized services, such as transplants and trauma or burn care.”

In his testimony, Ginsburg outlined the shifting balance of power between health plans and providers over the last two decades. During the rise of managed care in the early 1990s, health plans pressured hospitals and physicians to cut costs, accept lower payment rates and assume financial risk for patients’ care. At the same time, hospitals began a wave of mergers and acquisitions to address excess capacity and to strengthen their clout with insurers.

The mid-1990s’ backlash against managed care helped shift the balance of power toward providers, particularly dominant hospitals, Ginsburg said. In the late-1990s when the economy rebounded, employers were more concerned with recruiting and retaining employees than with controlling health care costs and embraced health insurance products with broad provider networks. Without a credible threat of excluding a provider from their networks, health plans lost an important bargaining chip, according to Ginsburg.

“When the economy slowed again in the early 2000s, employers did not limit provider choice, but instead began to pass responsibility for containing costs to their employees through higher patient cost sharing in the form of larger deductibles, coinsurance and copayments. Provider demands for higher payment rates and other favorable contract terms led to a spate of plan-provider contract showdowns in the early 2000s, when many providers threatened and some actually dropped out of health plan provider networks,” Ginsburg testified.

“As insurers abandoned tightly managed care practices and moved to create broad provider networks, health care spending for employer-sponsored insurance began accelerating in the late-1990s with increased volume initially playing a larger role in more rapid spending growth than higher prices,” Ginsburg testified. “In the wake of highly publicized and sometimes disruptive contract disputes in the early 2000s, health plans and providers in many markets reached a ‘separate peace,’ with plans—and employers tacitly—agreeing to go along with higher payment rates to get along.”

Ginsburg pointed out that that purchasers and public policy makers can address provider market power and the role it plays in rapidly rising health care costs through two distinct approaches—using market approaches to strengthen competitive forces or constraining payment rates through regulation.

The Center for Studying Health System Change is a nonpartisan policy research
organization committed to providing objective and timely research on the nations
changing health system to help inform policy makers and contribute to better
health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.